No 2019 Recession Because Of Housing

Earlier this summer, many investors predicted real residential investment growth would finally get out of the doghouse it has been in for 6 quarters. And that it would also have a positive impact on Q3 GDP growth. Based on early indications from the Atlanta Fed GDP Nowcast, it looked like we were wrong. 

Things have recently turned around as the decline in rates has spurred demand. I mentioned in a previous article how MBA purchase applications were up 15% yearly. Extreme selloffs in treasuries in early September could have been problematic for mortgage rates if it continued, but it hasn’t. Therefore, we can expect strong housing data for the rest of the year. This will help prevent a recession this year.

I think it’s highly unlikely the economy heads into a recession in the next 6 months. This yield curve inversion was different because long term yields fell, helping the housing market. This was the “good kind” of inversion. I put that in quotations because we haven’t seen such an example in recent history. However, that doesn’t make it impossible. It’s very much possible as seen in the latest housing data. New home sales hit a cycle high in June and permits just hit a 12 year high.

Amazing Housing Starts

Housing starts and permits in August were amazing which is great for GDP growth. It’s now less likely GDP growth is below 2%. 2.5% growth is nothing to write home about, but it’s good for a slowdown that could have been a recession. This is similar to how Q3 earnings growth will probably be about 3%-4% based on Earnings Scout data. That’s not great growth, but it’s much better than the fears of an earnings recession.

Specifically, housing starts were 1.364 million which beat estimates for 1.251 million and the high end of the estimate range which was 1.275 million. This was up from 1.215 million which was a positive revision from 1.191 million. Housing starts were the highest since June 2007. Many economists stated the problem with the housing market this cycle was demand, but inventories show it was supply. Recent slowdowns in starts and decline in rates eliminated some of that supply, allowing for starts to increase again.

As you can see from the chart below, the 3 month average yearly housing starts growth was 4.6% which is nowhere close to signaling a recession. In the 12 months prior to the past 7 recessions, the 3 month average of yearly housing starts growth was -5.3%. For a brief moment earlier this year, the 3 month average signaled a recession, but that signal was quickly pulled back. 

Some think that was enough to signal a recession. I disagree because housing will now help GDP along with consumption growth. How can there is a recession with a strong consumer? The longer we go without a recession, the less power that signal has. Looking at the past 5 recessions, the 3 month yearly average growth was -13% because housing cratered before and during the last recession.

Permits Signal An Improvement In Housing Starts

Permits were also very strong in this report as they increased from 1.317 million to 1.419 million. It beat estimates for 1.3 million and the high end of the estimate range which was 1.336 million. We also have analysis on how the 3 month average yearly growth rate in permits looks compared to how it has done prior to the recent recessions. 

It also signals the economy isn’t close to a recession. 3 month average of permits growth was 2.1%. In the 12 months before the past 7 recessions, growth was -6.1%. It briefly hit that 3 times in this expansion. The average using the past 5 cycles was -13.6%.

As you can see from the chart below, permits lead starts by 6 months which means starts will increase further this year which will help real residential investment growth. I’m very interested to see how much the estimate for Q3 real residential investment growth improves in the next update of the Atlanta Fed’s GDP Nowcast which is on September 27th. We are about 5 weeks away from the preliminary Q3 GDP report as it will be released on October 30th.

No Recession Signal From Leading Indicators Yet

August leading indicators report showed 0% monthly growth which met estimates. July reading was revised down 0.1% to 0.4% growth. It’s probably a win that this indicator is still at its record high since stocks fell in August. Investors expect it to show improvement in September as the stock market has had a great month. 

S&P 500 is up 2.74% month to date. Specifically, the leading index was positively impacted by building permits, the leading credit index, and manufacturing hours worked. That’s the building permits report I just reviewed. The leading index was hurt by the manufacturing components and the yield curve. In the past 6 months, the leading index is up 0.5% and 1.1% annually. Coincident index is up 0.6% in the past 6 months and 1.9% annually.

Everyone uses the leading indicators report to see if there is a recession coming. It looks like this is the 3rd slowdown of this expansion. As you can see from the chart above, the leading index to coincident index ratio is stable like in the last 2 slowdowns. It’s not crashing like in 2006 and 2007. If this slowdown lasts as long as the other 2, it looks like it is about halfway done. There can be a cyclical upturn in 1H 2020.

Since the leading index is at a record high, it’s not signaling a recession as it fell from its peak 20 months before the last recession, 10 months before the 2001 recession, and 17 months before the early 1990s recession. 6 month moving average of the 6 month rate of change is almost signaling a recession as it shows 0.4% growth. 

Anything below 0% is a recession signal. Finally, the 12 month moving average of the 12 month rate of change shows 3.2% growth which isn’t a recession signal. Growth bottomed between 1% and 2% in the prior 2 slowdowns.